The Cost of the Student Loan Pause Now Exceeds the Cost of Student Loan Cancellation

The Trump and Biden administrations both saw fit to pause student loan payments and interest for the duration of the pandemic (and beyond). The Department of Education and the White House have estimated that the cost of the student loan pause is $5 billion per month. However, using more accurate accounting, we find the true cost of the student loan pause to be $8.5 billion per month.

This number does not include other pandemic-related student loan relief, such as the Limited PSLF waiver program. The prime reason that both administrations underestimate the cost of the pandemic student loan relief is due to not accounting for the cost of paused IDR payments.

Perhaps one reason why broad cancellation has not occurred yet is due to concerns over cost. However, when we look at more accurate numbers of the cost of the student loan pause, we will see that the cumulative cost of the student loan pause now likely exceeds the cost of canceling $10,000 for every borrower.

How does the government calculate the cost of the student loan pause?

The Biden Administration recently cited that the student loan pause helps borrowers save $5 billion per month.

Of the more than $1.6 trillion federal student debt, approximately $170 billion belongs to commercial lenders, whose loans are backed by the government, but not owned by the government.

That leaves roughly $1.4 trillion that would be subject to the pause in interest.

The government’s estimate of $5 billion a month, times 12, is $60 billion a year.

$60 billion per year, divided by $1.4 trillion, works out to an aggregate interest rate of 4.3% on the total debt.

This makes sense, as the subsidized loans average interest rate is 3.8%, and the PLUS Loans average rate is in the 6.4% range.

But it's an interest-only cost estimate. Paused payments during the pandemic count toward income driven repayment (IDR) plans and student loan forgiveness.

The NY Fed projects that this pause has saved borrowers approximately $195 billion in payments from March 2020 to April 2022. If you count up until August 2023, the total payments saved is probably over $300 billion.

The government has not estimated the cost of paused payments perhaps because they expect these payments will eventually be received at a later date. However, this isn't the case for IDR plans.

What costs should be measured for the pause?

Adding the entire cost of paused IDR payments at first glance might not make sense. However, this is how we measure the cost of paused interest.

Nonsensically, the government measures growing accrued interest for borrowers on IDR plans as profit even though it will be forgiven. Perhaps this is because if borrowers choose to pay off the loan instead, then this interest income would be profit.

Similarly, not all borrowers on IDR plans will pursue forgiveness. However, since the credited payments toward IDR plans during the pause counts toward forgiveness, a similar accounting measurement would treat the entire cost of the paused IDR payments.

The number of borrowers on income-based repayment does not include the many borrowers who have graduated since March 2020 and who have not yet applied, but who will likely receive credit for months after their grace period.

There are also additional student loan relief programs that could only be implemented through executive action thanks to the HEROES Act of 2003, which gives additional powers to the executive branch over student loans in periods of national emergency.

What is the cost of paused IDR payments during the pandemic?

Borrowers on IDR plans may or may not pursue forgiveness long term, but most of them will. Furthermore, borrowers who have not yet submitted their IDR paperwork are not included in the numbers yet.

Presumably, the Department of Education will give credit for IBR plans to these borrowers for the period after their six-month grace periods would have ended after graduation.

So to calculate the cost of paused IDR plans during the pandemic, we need to know the number of borrowers on each repayment plan. We also need an estimate of what the typical borrower would pay under each of the four income-driven options.

How many borrowers are on each income-driven repayment plan?

Here is the number of borrowers on each IDR plan from September 30, 2021, published by the Department of Education.

Plan	Number of borrowers
Income Contingent Repayment (ICR)	770,000
Income-Based Repayment (IBR)	3,530,000
Pay As You Earn (PAYE)	1,520,000
Revised Pay As You Earn (REPAYE	3,340,000

In total, there are 9.16 million borrowers using income-driven repayment plans on Department of Education owned student loans.

How much is the average IDR payment?

Ideally, the Department of Education would provide this number, but I have not found it published anywhere.

Some borrowers would pay $0, and high-income attending physicians pursuing PSLF would pay thousands a month.

Prior Federal Reserve research has found the average student loan payment to be $393 a month.

We will need to calculate the average IDR payment for the four different sets of IDR payment options.

Calculating the average payment on PAYE, REPAYE, ICR and IBR

The average starting salary for the class of 2020 was $55,260, according to the National Association of Colleges and Employers.

Most borrowers utilizing IDR plans completed college, and many have graduate degrees. Additionally, most are not recent graduates, with the average Direct student loan borrower having a median age of 33.

Hence, using the average college graduate’s starting salary is a reasonable assumption to use to calculate the different monthly payments for the various IDR plans.

Using Student Loan Planner’s payment calculator, this is the monthly payment for the four different IDR plans using the latest 2022 federal poverty line guidelines:

Plan	Average monthly payment
ICR	$690
IBR	$433
PAYE	$288
REPAYE	$288

What is the aggregate cost of paused income-driven payments?

To calculate the cost of paused payments per month for each plan, we simply need to multiply the average payment by the number of borrowers utilizing the plan. More borrowers use more generous plans like PAYE and REPAYE instead of the less generous IBR and ICR plans, but IBR and ICR plans have higher average payments.

Here’s the total cost:

Plan	Total cost (per indicated plan)
ICR	$531,300,000
IBR	$1,528,490,000
PAYE	$437,760,000
REPAYE	$961,920,000

TOTAL (all plans): $3.46 billion per month

What is the total cost of the student loan pause during the pandemic?

The Department of Education estimates that pausing student loans during the pandemic has cost $5 billion per month.

However, that figure represents only the interest pause cost.

When we add the $3.5 billion cost of paused income-driven payments counting for forgiveness, the total cost of the student loan pause is $8.5 billion per month.

If the pause expired around August 30, 2023, unless the courts rule on lawsuits sooner than that, borrowers will have received relief for about 29.5 months. Additional relief would add $8.5 billion per month to the total.

Additional relief from the PSLF waiver

The PSLF waiver, which expired October 31, 2022, also represents additional relief due to the pandemic. As of early March 2022, the White House announced borrowers had seen $6.2 billion discharged. This figure is about $24 billion when the program expired. More is on the way due to the IDR waiver bringing many of the same benefits.

The White House also estimates 550,000 borrowers will get 2 years closer to forgiveness because of the waiver. If we assume the borrowers use the REPAYE program with an average payment of $288 a month, the total relief from this additional forgiveness credit would be $288 x 12 x 550,000 = $1.9 billion.

This estimate from the White House likely undercounts the amount of additional credit borrowers will receive under the PSLF waiver. After the White House made the PSLF waiver announcement, the Department of Education started to allow borrowers to consolidate loans with different payment counts and get credit for the loan with the most payments credited to their consolidation loan. Anecdotally, many of our physician clients have eliminated years off of their 10 year PSLF repayment thanks to this feature of the waiver.

Relief from the IDR waiver

The IDR waiver will bring even more relief than the PSLF waiver because it extends benefits to a larger group of people. We estimate at least $211 billion of student debt could be cancelled under the IDR waiver, which is larger than the $140 billion possibly eligible to be forgiven via the PSLF waiver.

We saw a 17% take up rate for the PSLF waiver. The IDR waiver is easier as it only requires consolidation and not consolidation plus an application. So the total might be more like 20% take up rate.

With $211 billion at least potentially eligible, that would mean $42.2 billion in benefits from the IDR waiver.

Why the student loan pause cost exceeds the cost of canceling $10,000 for everyone

Hence, our current estimate of the total cost of the student loan pause excluding the IDR waiver would be [$5 billion (interest pause) + $3.5 billion (IDR pause)] x 41.5 + $24 billion (PSLF waiver discharge) +$42 billion+ $1.9 billion (additional PSLF payment credit) = $420.65 billion.

Even excluding the cost of the PSLF and IDR waiver, the cost of the student loan pause would be over $350 billion based on our estimates, which include the cost of paused IDR payments.

Our current student loan pause cost estimate is far higher than a recent Department of Education report, which cited the cost as “at least $95 billion.”

The Committee for a Responsible Federal Budget (CRFP) estimates that the cost of canceling $10,000 of student debt for every borrower would be $245 billion. As a right-leaning think tank, they have no incentive to understate the cost of cancelling student loan debt.

It seems clear that the cost of the student loan pause has now surpassed the cost of cancellation.

This is an ironic outcome as Presidents of both parties utilized the student loan pause presumably because they viewed it as a less costly way to give relief to student loan borrowers.

How the student loan pause could have been student loan cancellation

At a minimum, there is more pandemic relief on the way from the PSLF waiver. That will raise the cost significantly above the $420 billion we estimate above. There could also be additional student loan pause extensions and relief beyond August 30, 2023 that could push the total cost well north of $500 billion.

Student loan relief during the pandemic has disproportionately benefitted the following groups of borrowers:

• Those with high incomes pursuing loan forgiveness under IDR (those with low incomes would have low payments anyway)
• Those with high debts they will eventually repay (borrowers who utilize forgiveness will never need to pay down the interest, which means it's primarily borrowers with the means to pay who benefit from an interest pause)
• Borrowers in public sector employment, who have received significant additional credit towards forgiveness due to the pandemic and, in some cases, are seeing their loans wiped out completely.

I want to be clear that we are in the business of giving student loan advice that best benefits our clients and readers. If we see a legal loophole, we feel duty bound to help a client take full advantage as an accountant would a tax break.

Even so, it's clear that pandemic student loan relief has not been targeted toward those who need it most.

Some progressive activists have stated, “if they can pause student loans, they can cancel them.”

What many do not realize is that we've already spent more money on the cost of the student loan pause. Policymakers will decide what's needed next for borrowers who were mostly left behind by the pandemic student loan relief.